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Taxing times
23 April 2010
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With wind-up petitions coming thick and fast, few know the insolvency territory better than Collector General, Gerry Harrahill, a party to every insolvency case in the country as he tries to recover taxes owed from failing companies. Claire Hartnett talks to Gerry Harrahill about the Revenue Commissioners' role in the changing economic climate.
Early engagement has been the oft-repeated mantra of the Revenue Commissioners. As the economic downturn gathered force, more and more companies buried their heads in the sand, hoping the problems would just go away or a magical solution would appear.
There was no magical solution of course, and over 1,400 companies collapsed last year, many of which were wound-up at the behest of the Revenue Commissioners.
But with the recession rumbling on for two years now, it seems that Irish companies are finally wising up to the fact that they need to face their problems early and engage with revenue as soon as possible.
"Certainly things are improving in terms of the general environment of what's happening between revenue and directors. We've had a good response from directors and the work that revenue has been doing in terms of highlighting the importance of engagement at an early stage has certainly worked. But there are still too many examples of companies getting into difficulty and hoping that they can solve the problems themselves or the solution will show itself and it'll be solved miraculously somehow," says Harrahill.
In some cases, Harrahill's office has to petition the courts to wind-up a company just to prevent the business racking up further losses.
"If there isn't engagement by the company, or the nature of the engagement is such that engagement would not result in the debt being cleared, then revenue will seriously consider petitioning the courts. This ensurers that the debt doesn't continue to escalate and gives the liquidator the option to bring before the courts the possible restriction or disqualification of directors."
But Harrahill admits that the liquidation route hasn't typically resulted in large payouts for revenue.
"Liquidation doesn't result in significant recovery a lot of the time but if the business takes the approach that it's going to continue to operate and not meet its tax obligations, then revenue can't stand idly by and must take all factors into account. Sometimes we have to put in the liquidator in the knowledge that we won't recover much, or anything, just because we have to stop the escalation of debt."
Liquidation isn't the only option for companies struggling to pay the tax man and revenue introduced the Case Decision Escalation Framework last year to deal with the growing number of companies struggling to pay their bills. €84 million worth of debt is now being paid to revenue in this way.
"In the normal course of the last ten years there would always have been instances of businesses running into short term cash-flow problems and we dealt with it but it's different now and the pressures that businesses are suffering are not created by themselves but are usually external," Harrahill explains.
"A business could be supplying goods or services and they could find that a company who owes them €10,000, €20,000 or €30,000 has gone bust and the real challenge is to try and recover that and pay the revenue bill. There's also particular pressure on businesses to increase their lending or credit facilities but the big issue is that banks won't extend their credit or they've cut their overdraft and credit facilities.
"Now we're in an environment that a lot of businesses were not in in the late 1990s and early 2000s and it's an unusual set of circumstances. The [Case Decision Escalation Framework] provides for that and allows more complex cases to be speedily resolved. We've put close to 1,300 businesses through that process so it's successful for them and it's successful for us in securing tax payment."
Harrahill also stresses the responsibility that revenue has to maintain a level playing field for companies that are in compliance with their tax obligations.
"It is a difficult, challenging economic environment but, having said that, we have to expect that businesses give appropriate priority to meeting their tax obligations. It's important for two reasons. It's important that the exchequer gets the funds it's entitled to and it's important to maintain a level playing field and that companies who don't fulfil their tax obligations don't have a competitive advantage over those who do."
As a general approach, Harrahill encourages companies to approach revenue as soon as issues arise, but that doesn't guarantee they'll get a free pass and companies engaged in scheme of arrangements with revenue also have to pay interest on their revenue liability:
"As night follows day in a scheme of arrangement, or whenever a company falls behind on its obligations, they'll pay interest charged as part of it. This compensates the exchequer for the loss of money and again it goes back to the level playing field -– the difference in cost reflects those who pay on time and those who don't."
In the past few months, the practice of companies using employee tax contributions as working capital has come under the spotlight.
Back in January, Mr Justice Peter Kelly strongly criticised the Stokes' brothers management of their private members' club Residence and said it was a "form of thieving" to use employees' money deducted for PAYE and PRSI to subsidise the business.
Some have called for the practice to be made illegal, but Harrahill believes the issue is not black and white.
"Realistically, VAT and PAYE deductions from employees wages are often used as working capital in normal business circumstances. It doesn't create a concern for us once the date of payment comes and the company pays its tax bill. As part of the normal routine, it's not unusual for businesses to use this money for cash flow during the month. The crucial thing, however, is when the date of payment comes they need to pay. In the vast majority of cases, businesses manage their cash flows fine and pay efficiently but the real difficultly arises when they can't pay."
The Collector General points out that in other countries, employee tax deductions have to be lodged into a special account and can't be used as working capital. But he believes introducing such legislation could stifle businesses here and create cash-flow problems.
"I think the solution needs to be informed by the fact that the vast majority of businesses don't have compliance issues. [The introduction of legislation] could create a situation where companies could struggle because the cash flow is taken away from them. Going down that route has certain attractions but it needs to be weighed up carefully. It could hurt businesses and the vast majority of businesses are compliant even if they use VAT and PRSI as working capital – when it comes to the date of payment they pass in onto revenue."
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